Economy

9:57 am

Mon May 13, 2013

Is The Housing Recovery Just A Mirage?

This is TELL ME MORE from NPR News. I'm Michel Martin. Coming up, as we head into graduation season, we want to talk about a new report about changes and challenges at the nation's historically black colleges and universities. That's coming up. But first, it's also the beginning of what has been historically the spring home buying season.

So over the next few weeks we're going to talk from time to time about important issues related to housing. And there's some good news there - sales are going up while foreclosures are going down. But our next guest says a lot of those numbers don't quite add up to a real recovery, especially for potential homeowners.

In fact, the percentage of Americans who own homes in still in decline. We wanted to talk more about that so we've called upon Rana Foroohar. She is an assistant managing editor for Time Magazine. She covers business and economics. She recently wrote a piece that caught our attention. It's called "The Housing Mirage." And she's with us now. Welcome. Thanks for joining us.

RANA FOROOHAR: Thanks for having me.

MARTIN: So why a mirage? You quote an expert who says we're not seeing a housing recovery; it's a housing pre-covery. What does that mean?

FOROOHAR: That's right. Well, what's happening is that, yes, home prices are going up. Foreclosures are going down, as you mentioned. But who's doing the buying? At this point, the market is being driven by investors and when I say investors I mean not only private equity firms that are buying up 20,000 properties and renting them out, but also very rich individuals who can afford to, say, pay cash down for an apartment or a home.

They might then be renting that out to garner additional income themselves. What's missing is that folks that still depend on mortgages are out of the market. I mean, they are really not in the market en masse yet. We're seeing those numbers tic up just a little bit but the market is being driven by investors and that's because credit is still very tight.

Banks are just not giving out loans and credit standards are still much tighter than they were before the financial crisis.

MARTIN: You also talk about the fact that there's a geographic split, that there are some cities that are doing pretty well.

FOROOHAR: Yeah.

MARTIN: And other areas are not doing well at all. Why would that be? Are investors just more attracted to some areas than others?

FOROOHAR: Well, you know, like everything in our economy, we've got sort of a two-tier recovery. We've got parts of the country that are doing very well. We've got types of people that are doing well. We've got jobs that are doing well. But it's a very two Americas kind of scenario. So there are places like D.C., L.A., part of New York that are booming, really, you know?

In part driven, again, by those investors, often foreign buyers, people that are still at the top tier of the job market who are actually doing pretty well. But you've got other cities - Detroit, parts of the Inland Empire, as they say, in California - that are still awash in foreclosures and really having a hard time. So the housing recovery - or pre-covery, as I call it - is very geographically mixed, depending on where you go.

MARTIN: How important is a healthy housing recovery? I'm trying to figure out if I can get you to explain why this matters to somebody who doesn't need a house, isn't looking for a house.

FOROOHAR: Yep.

MARTIN: I mean, you can understand why if you - let's say you're a newlywed, you're ready for that first home. You keep trying to buy a home and you keep getting beaten out by investors...

FOROOHAR: Yep.

MARTIN: ...who can pay cash and you can't. You can see why that's annoying. But let's say that's not you. Why does this matter to the rest of the country?

FOROOHAR: It's a great question. And the answer is that we live in a consumer economy. Our economy is made up of about 70 percent consumer spending. There is nothing that stimulates consumer spending like housing wealth. Every dollar of increased housing wealth has a much greater knock on effect in the rest of the economy.

Because if you think about it, when you buy a house you also have to buy stuff to go in it, right? And housing wealth, we can really feel that. That makes us feel secure, much more so even than stock wealth which is a kind of a more just sort of ephemeral thing. You don't really feel it like you do a house. So when housing wealth goes up, when the housing market is healthy, you really start to get that healthy consumer economy that we need to have a really robust recovery.

MARTIN: We're speaking with Time Magazine's Rana Foroohar who recently wrote a piece titled "The Housing Mirage." Can we talk more about why this problem persists? There have been a number of programs, interventions that the Obama administration has announced with much fanfare. None of those things seem to make a difference. I mean, you point out that the homeownership rate is lower than it's been in decades.

FOROOHAR: That's right.

MARTIN: We had a guest last week who also is an expert on housing finance and he says that the lending guidelines are still too tight. That they're too...

FOROOHAR: Yeah.

MARTIN: ...unforgiving. Other people would say that's ridiculous, that part of the reason we're in the situation that we're in is that there are too many people given loans that they simply couldn't afford and couldn't pay for. What's your take on this?

FOROOHAR: Well, the truth is, you know, not to be a three-handed economist here, but the truth is that both of those things have a little bit of merit. I mean, let's face it. Before the crisis there were a lot of problematic loans. Homeownership is not for everybody and we don't want to go back to that period. But right now, credit is not too far from where it was right after Lehman Brothers fell.

Despite the fact that the economy, it really has gone into a recovery and we're in a very different place now. Now, that comes down to the banks. Why are the banks being so tight about giving out credit? Well, in part, because they don't know what their business model is going to be in the future. They don't know what the rules of the road are going to be.

So one thing to keep in mind is that Dodd Frank, the piece of legislation that was signed into law three years ago that is going to be re-regulating the banking sector and trying to make it safer, really cleaning up the banking sector, it's still being written. Three years on from being signed into law, those rules are still being written.

So banks and financial institutions are waiting to see what their landscape is going to look like before they start making those loans over a 15 or 30 year period.

MARTIN: Well, there are those who argue really what they are doing is just profit taking.

FOROOHAR: Mm-hmm. Well, that's, you know, I think that there's probably some truth in that too. And I think, you know, we need to tell the banks - regulators need to tell the banks, Congress needs to come up with rules for Dodd Frank and tell the banks are you going to be allowed to mix certain kinds of more profitable trading with the plain vanilla lending and the mortgage lending that we so desperately need?

I would also go back, frankly, to the beginnings of the financial crisis and say that we probably should've prioritized saving homeowners as much, if not more, than saving banks. And I think that that's something a lot of people would say in retrospect.

MARTIN: What's the chicken and what's the egg? I mean there are a lot of people saying part of the problem here - that housing is dragging because employment is dragging. There are still a lot of people who aren't making enough money or aren't working enough hours to give them the resources to either buy a home, compete effectively for a home, or clean up their credit. What's your take on this?

FOROOHAR: I would say the conventional wisdom over the last decade or so has been that you need a healthy housing market to have a real recovery. But actually, I think you probably have to flip it. Ultimately, the thing that drives housing is employment. If employment starts to come down, if wages start to go up, if people have money in their pockets and if their credit is better, than they're going to be able to get loans and the housing market is going to rise.

So I think really we need to flip it and say a healthy housing market depends on a robust economic recovery.

MARTIN: You're saying that the kind of conventional wisdom has been that, you know, housing really leads the recovery in this country.

FOROOHAR: Mm-hmm.

MARTIN: In the past what levers have been pushed to get that going? And are those levers just not available right now?

FOROOHAR: Well, it's a great question. I mean, and that comes down to monetary policy. Which is about interest rates. The Fed - Federal Reserve - controls how interest rates rise and fall. And we've been in a period of declining interest rates for a long time now. I mean, you know, interest rates are 2.56 percent, something like that. I mean these are record lows, historic lows.

So there's not a lot more that the Fed can do to bring that interest rate down and stimulate someone who wants to buy a new house to say, hey, borrowing costs are really low. I'm going to go out and take that leap. I mean, if you look back 20 years ago, 30 years ago in the '70s, we were in double-digit interest rates. You know, my parents when they bought a home they were probably paying 11, 12 percent on a loan.

And now you can pay under three percent. It's kind of incredible. So we've sort of maxed out our policy levers. What we really need to do is focus on jobs and unemployment to get people able to have the money to spend on a house.

MARTIN: But why is it, though, with money that cheap, that more individual homeowners can't take advantage of that? You know, why is that?

FOROOHAR: Well, this goes back to that credit issue, because if you need a mortgage, it doesn't matter if the interest rate is 3 percent, 2 percent, 11 percent. If you don't have that down payment, if you don't - the bank can't look at you and say, hey, you're a good credit risk. We think that that job you got is going to last and your wages are strong enough. Then they're not going to give you that loan. So that's why investors who have cash in hand are driving this market, because nobody will argue with an all-cash sale.

MARTIN: That's true. So what about - so two more questions, if we can. Is there anything wrong with the fact that investors are buying up these homes? Is there something bad about that?

FOROOHAR: No. There's not something bad about it and, in fact, you might find some people that would say, you know, we should have more renters in this country, so to the extent that investors tend to be people who buy up properties and then offer them up as rental homes and rental apartments, maybe that's a good thing.

Bob Shiller, the famous professor at Yale who predicted the housing crisis and now runs the Case-Shiller Housing Economic Indicators would probably argue that renting is a great idea. That said, there are still a lot of people that want to own a home. It is a very entrenched part of the American dream and, in some cities, it makes a lot of sense.

You know, I happen to live in Brooklyn, New York. Supply is 44 percent down from its norms, which means that rental properties and rental prices are really rising. So if you have some money and you can get a mortgage with a low interest rate, it's actually a great time to get in and buy rather than pay a high rental.

MARTIN: And finally, is there anything that the home buyer who we're talking here, somebody who wants to buy a home, hasn't been able to do so, yet can do to make himself or herself more attractive to lenders? Or is this really, in your opinion, a policy issue? This is an issue for regulators. They need to jawbone or do whatever it is they have to do to get lenders to loosen the reigns.

FOROOHAR: It's largely a policy issue, and it's largely, as I say, a macroeconomic issue in the sense that it's about unemployment. When we have lower unemployment and when wages can finally start rising and people can bring down their debt levels that they need to and get those credit ratings where they ought to be, then we'll have a stronger market for people who need mortgages.

I'll give you a number that's fairly telling. Most lenders would like to see a credit rating of around 750. Most Americans have credit below 700. So that tells you sort of where we're at.

MARTIN: Rana Foroohar is an assistant managing editor at Time magazine. We were talking about her recent piece, "The Housing Mirage." She was with us from Times' offices in New York City.